This is How Microsoft Can Find Its Smart Phone Niche

While Windows Phone has indeed failed in the market place, there is one glimmer of hope for the near future. With Microsoft committing to continue developing new handsets going forward, the software giant can use a previous turnaround as the blueprint for finding a niche for Windows phones going forward.

And to be clear, it will always be a niche. Microsoft knows this. But it also knows the importance of listening to its best customers, and providing the experiences and products they expect and demand. And in promising to continue creating first-party hardware while also publicly stating that it will never grow a real business in doing so, Microsoft has hinted, if subtly, how it can do right by Windows Phone fans, even while it looks to a future beyond phones.

And it’s a simple enough strategy. In fact, it’s one they already successfully implemented with a different hardware line.

I am referring of course to Surface.

We’re all probably overly-familiar with Satya Nadella’s email this week about layoffs and write-offs associated with Microsoft’s phone business. But Mary Jo Foley has also published a second internal email, written by Microsoft COO Kevin Turner, which provides the basis for what I feel is Microsoft’s short-term strategy for Windows phones.

Microsoft “will focus on building the very best Windows phones on a quicker timeline,” Turner writes. “[It] will also focus on the channels and markets that offer the best returns. This is a similar approach to the one [Microsoft] have taken with Surface, which has been very successful. Phones remain a critical component of the Microsoft device portfolio and an important piece of our mobility strategy, but a restructuring is in order.”

Here’s the Surface story in a nutshell. In late 2012, Microsoft released two Surface models, Surface RT and Surface Pro, with the express strategy of beating iPad. This strategy persisted through the first two generations of the product, and the result was a $900 million write-down related to unsold inventory. In August 2013, I openly wondered whether Surface could be saved. “Surface—and, as alarming, the entire ecosystem of Windows 8/RT-based tablets, for that matter—has crashed and burned in the face of simpler and less expensive Android tablets and the iPad,” I wrote at the time.

So what changed? Simple: Microsoft started listening to its best customers and set Surface down a different path, one that would never see the product line dominate the PC or tablet industry but would instead provide fans with the flagship devices they want, and in doing so provide other hardware makers with the inspiration they need to make compelling devices of their own.

The result of this strategy change was Surface Pro 3, a device so successful that Surface—the one-time laughing stock—is now Microsoft’s newest billion-dollar business. Surface Pro 3 addressed most of the complaints from Surface Pro/Pro 2, adding a bigger, more usable screen, and kept all of the stuff that Microsoft got right from the get-go. And the user base responded.

Microsoft needs to do this for Windows phones.

No, it doesn’t need Surface branding, nor does it need for its phones to look like Surface tablets. What I mean is that Microsoft needs to apply the learnings from Surface to Lumia/Windows phones and listen, and then deliver what its best customers really want. And it needs to create devices with capabilities that simply don’t exist on other platforms.

Short-term—and to be clear, any talk about first-party Windows phone hardware is just a short-term concern—that means Windows 10, yes, but also devices that take advantage of unique Windows 10 features. It means Windows Hello-compatible cameras and/or fingerprint readers for instant sign-ins. And it means Continuum functionality via docks, wireless, or cables, so customers can use their phones as real PCs when they sit at their office desk.

That’s what a Surface Pro 3 applied to Windows phones looks like. Something that is unique but also uniquely useful.

Longer-term, Microsoft is of course looking past phones, and I want to be very clear about this: Windows Phone has lost the smart phone war, and there is no level of future success that can or will change that. But the firm has also committed to continuing with a faster-moving lineup with fewer product models, and it will drop carriers and even countries in which Windows Phone simply never succeeded. (This does not include the United States; you can’t have a smart phone business and ignore the US.) In doing so, it can buy time to see where the next hardware innovation jump occurs, continue and improve its manufacturing capabilities, and please its best customers. It’s a win-win.

Is this Microsoft’s plan? I don’t know for sure, but it has to be. And sometime in the near future, we’ll see the first hardware products that point to this future, though it could be 2016 before its fully-realized.

Everything that has happened this week is bad news, there’s no sugar-coating it. But Surface shows us how a disgraced Microsoft product line can gain both respect and a solid customer base. Microsoft can at least do the same for Windows phones.